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On Balance Volume Indicator Explained with Trading Strategy

Volume is most important indicator in technical analysis of course after price. Most of the technical analysts rely heavily on volume to confirm trend or trend reversals. Dow theory also emphasize on volume to validate trend. Volume being so important in technical analysis, lots of research is done on this and have come up with indicators like MFI, Chaikin Money Flow, ADL and of course OBV the indicator we are here to understand. OBV was developed by Joe Granville in 1963 to help analyst to find correlation between price and volume.

Greater details of price volume correlation include Volume precedes price, rising Volume in uptrend and price volume divergence is explained here. We recommend to read it together with OBV to have deeper understanding as some of the terms used in current article, is well explained there.

On Balance Volume helps to distinguish buying pressure versus selling pressure. OBV increases when trade volume during up days are higher than than trade volume during down days. Rising OBV signal precedes upwards movement of the stock and lower OBV may lead to fall in price.

Calculation and use of OBV is very simple. It is one of the simplest indicators to use. It is simple addition or subtraction of volume depending on change of closing price from previous days.

Different Scenarios


Price Change Buying/Selling Pressure OBV Calculation Change in OBV Possible reasons /outcome
Current Closing > previous Closing price Buying pressure is increasing OBV = Previous
OBV + Volume
Increase in OBV
  • Smart Money investing
  • Accumulation
  • Strong Uptrend
  • Upward Breakout
Current Closing = previous Closing price No mesurable impact OBV = Previous OBV No Change in OBV
  • Lack of activity
  • Sideways Market
  • Stay Away
Current Closing < previous Closing price Selling pressure is increasing OBV = Previous
OBV - Volume
Decrease in OBV
  • Smart Money moving out
  • Volume Price Divergence
  • Trend reversal
  • Fall in price


As we know absolute value of volume is meaning less when applied across stocks. For some stocks 1 Million trade is high while for others 10 Million is average. Since OBV is primarily dependent on volume, its absolute value will not make much sense. Interpretation of OBV is about direction of its movement, its momentum, its support and resistance and its divergence with respect to price. Lets understand them one by one.

1.OBV Breakout
Volume precedes price. This is a stage where smart money comes in the markets and process of accumulation begins. This should be treated as a nice bullish signals. This is first step of bull run.(Images With Example Coming Soon)

2.Positive Divergence
This is the state when higher highs are formed by OBV but price remains range bound. This signals a possibility of uptrend and breakout of price from trading range. This is first leg of bull run.(Images With Example Coming Soon)

3.Uptrend supported by Volume
Higher OBV higher Price signals uptrend is well supported by price. This should give confidence to the trader to continue in the stock or even add more. This signals second leg of bull run.(Images With Example Coming Soon)

4.Negative divergence
This is last step of bull run and it could be followed by immediate trend reversal and a possibly a strong one.(Images With Example Coming Soon)

Summary of OBV Interpretation

Ranging Market Rising OBV Positive Breakout Bullish Signal
Falling OBV Negative Breakout Bearish Signal
Up Trending Market Rising OBV Up Trend Confirmation Bullish Signal
Falling OBV Divergence, Reversal Warning to Bulls
Down Trend Falling OBV Down Trend Confirmation Bearish Signal
Rising OBV Divergence Warning to Bears

Cautions

These days both day trading and robotic trading activity has increased which leads to high volume activity and thereby affecting quality volume analysis.
Our website provides also provides free Stock screening based on Different Bearish Candlestick Pattern. It can be found at below link:

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(All analysis is based on End of Trade day's Value. Expected time of update is between 5 to 5.30 PM exchange time Zone)

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